Question 1

Any external ﬁnancing need is generally covered by:

Accepted Answer

Any external financing need can be covered by adjusting the level of debt or equity. This can be done through issuing new shares or taking on more debt. This option allows the company to bring in external funds without relying solely on the company's net income or operating cash flow.

Question 2

Suppose a ﬁrm has net income of $50, dividends of $15, assets of $1,200 and a debt-equity ratio of 3.0. What is the sustainable growth rate?

Accepted Answer

The sustainable growth rate can be calculated using the formula:

sustainable growth rate = (net income - dividends) / (total assets * (1 - debt-equity ratio))

Substituting the given values, we get:

sustainable growth rate = (50 - 15) / (1,200 * (1 - 3.0)) = 9.6%

Therefore, the best choice is C with the explanation that the sustainable growth rate for the firm is 9.6%.

Question 3

The sustainable growth rate:

Accepted Answer

The sustainable growth rate assumes that a firm can grow at a certain rate without changing its debt-equity ratio, meaning it can use external financing to maintain its current leverage. It is typically higher than the internal growth rate, which assumes no external financing.

Question 4

Which one of the following is the key driver of most ﬁnancial plans?

Accepted Answer

The answer of Which one of the following is the...

Question 5

Pro forma ﬁnancial statements are:

Accepted Answer

Pro forma financial statements are projections based on a sales forecast assumption. They are used to estimate future performance and to help with financial planning. They are not required to be filed with the SEC or CRA, and they are not necessarily the most recently compiled accounting statements released to the public. It is not illegal to prepare pro forma financial statements.

Question 6

The retention ratio is calculated as:

Accepted Answer

The retention ratio is the percentage of net income that is added to retained earnings rather than paid out as dividends. It is calculated by dividing additions to retained earnings by net income. Therefore, choice B, which calculates the retention ratio as additions to retained earnings divided by net income, is the correct answer.

Question 7

Assume Xylon, Inc. is currently operating at less than full capacity. Which of the following would be LEAST likely to vary directly with sales?

Accepted Answer

Notes payable, a form of debt financing, is least likely to vary directly with sales compared to accounts receivable, accounts payable, inventory, and cash, which are more directly tied to the volume of business transactions and operational activities.

Question 8

Jasper Companies has a capital intensity ratio of .8 at full capacity. Currently, total assets are $76,900 and current sales are $88,800. At what level of capacity is the ﬁrm currently operating?

Accepted Answer

The capital intensity ratio is the ratio of total assets to sales at full capacity. Given the ratio is 0.8, the full capacity sales would be $76,900 / 0.8 = $96,125. The current sales are $88,800, so the firm is operating at $88,800 / $96,125 = 92% capacity.

Question 9

Big Mac's and Small Dog's are two ﬁrms that are equal in every way except for their retention ratios. Big Mac's has a 50 percent retention ratio. Small Dog's has a 60 percent retention ratio. Given this
Difference,

Accepted Answer

The sustainable growth rate is given by retention ratio x return on equity (ROE). Since Small Dog's has a higher retention ratio than Big Mac's, its sustainable growth rate will be higher as long as the ROE is equal. Therefore, Small Dog's has a higher sustainable rate of growth than does Big Mac's.

Question 10

Because Jerry's Ice Cream is currently producing at less than full capacity, the pro forma for next year should project:

Accepted Answer

Since Jerry's Ice Cream is producing at less than full capacity, it is likely they will need to invest in additional fixed assets to accommodate any potential increase in sales. Therefore, fixed assets are likely to grow slower than sales.

Question 11

Calculate retention ratio given the following information: cash dividends paid = $4,200; sales = $80,000; cost of goods sold = $30,000; selling and administrative expenses = $8,000; interest
Expense = $2,000; tax rate = 30%.

Accepted Answer

The answer of Calculate retention ratio given the following information:...

Question 12

All else constant, which one of the following will increase the internal growth rate?

Accepted Answer

The internal growth rate can be calculated as (ROA x b) / (1 - ROA x b) where ROA is the return on assets and b is the plowback ratio. Therefore, an increase in the plowback ratio (C) will increase the internal growth rate, all else constant. The other options will either have no effect or will decrease the internal growth rate.

Question 13

All else the same, the level of external ﬁnancing needed (EFN) increases with increases in the:

Accepted Answer

The capital intensity ratio measures the amount of fixed assets required per dollar of sales. As this ratio increases, it means that more fixed assets are needed to generate sales, which in turn leads to an increase in EFN.

Question 14

Which of the following statement is correct if a ﬁrm believes its costs and assets grow at the same rate as sales, the dividend payout ratio is ﬁxed, no new equity is possible, and the current debt-
Equity ratio is optimal?

Accepted Answer

If a firm believes its costs and assets grow at the same rate as sales, the dividend payout ratio is fixed, no new equity is possible, and the current debt-Equity ratio is optimal, then the sustainable growth rate will give the maximum rate at which sales can grow. This is because it assumes that all new asset requirements are financed by retained earnings and existing debt, and no new equity is issued. Option B is incorrect because the firm may still need to finance its growth through debt even if the debt-equity ratio is optimal. Option C is incorrect because asset growth can also come from depreciation, investment in new assets using retained earnings, and debt financing. Option D is incorrect because paying out all net income as dividends will limit the amount of funds available for growth, not increase sales. Option E is incorrect because the current ratio, which is the ratio of current assets to current liabilities, is unrelated to the firm's ability to grow sales.

Question 15

Which one of the following statements is correct concerning the external ﬁnancing need (EFN) and the dividend payout ratio? Assume EFN is a positive number.

Accepted Answer

An increase in the dividend payout ratio reduces the amount of retained earnings, leading to a higher external financing need (EFN) to support growth.

Question 16

Which of the following is the ﬁrst dimension of the ﬁnancial planning process?

Accepted Answer

The first dimension of the financial planning process is to establish a planning horizon. This involves determining the time period for which the financial plan will be created and implemented.

Question 17

A ﬁrm has a payout ratio of 40 percent and a sustainable growth rate of 8.5%. The capital intensity ratio is 1.1 and the debt-equity ratio is .5. What is the proﬁt margin?

Accepted Answer

The sustainable growth rate (SGR) formula is SGR = ROE * (1 - payout ratio). ROE can be expressed as (Profit Margin * Asset Turnover * Equity Multiplier). Given the capital intensity ratio (inverse of asset turnover) and debt-equity ratio, we can solve for the profit margin.

Question 18

Which of the following statements about ﬁnancial planning is NOT correct?

Accepted Answer

This statement is not correct as financial planning provides a way to check the feasibility and internal consistency of goals and plans made with regard to specific areas of a firm's operations.

Question 19

Which of the following ﬁrms would most likely be interested in knowing their sustainable growth rate?

Accepted Answer

A firm that believes its equity multiplier is at its optimal level would be interested in knowing its sustainable growth rate to ensure it can grow without changing its financial leverage.

Question 20

Financial planning focuses on:

Accepted Answer

Financial planning focuses on the major elements of the financial and investment policies, including budgeting, investing, risk management, and retirement planning. It takes into account both short-term and long-term goals and considers the balance sheet as well as the income statement. Capital structure and dividend policy are important components but are not the only focus of financial planning.

Quiz 4: Long-Term Financial Planning and Growth